The trade deficit in goods and services came in at $42.2 billion in October, smaller than the consensus expected $42.7 billion.

Exports fell $6.8 billion in October, while imports declined $4.8 billion. The decline in exports was led by soybeans, civilian aircraft and petroleum products. The fall in imports was led by cell phones and other household goods, pharmaceutical preparations and computer accessories.

In the last year, exports are up 1.0% while imports are down 0.8%.

The monthly trade deficit is $3.5 billion smaller than a year ago. Adjusted for inflation, the trade deficit in goods is unchanged from a year ago. This is the trade measure that is most important for measuring real GDP.

Implications: The trade deficit came in smaller than the consensus expected in October and was revised smaller for September. However, the reason for the decline is not such great news as both exports and imports contracted. The total volume of US international trade appears to have leveled off over the past several months. A year ago, exports were up 11.5% from the prior year (October 2010 to October 2011). But in the past 12 months, exports are up only 1.0%. Financial and economic problems in Europe may be playing a role. Exports to the Euro-area were up 7.5% in the year ending in October 2011, but in the past year they are down 8.7%. However, we also see a similar pattern of slower export growth with Canada, Central/South America, and the Pacific Rim. Two notable exceptions, where our export growth has improved in the past year, are to Africa and India. Long-term, beneath the headlines, higher energy production in the US is having large effects on trade with other countries. Real (inflation-adjusted) oil exports have tripled since 2005, while real oil imports are down substantially. We expect the trade sector will be a small negative for real GDP growth in 2013. This is a normal pattern when the US economy is expanding.

Remember the difference between static and dynamic tax analysis? The former posits that tax changes produces no change in market behavior, so that hiking taxes by 10% gets you 10% more in revenue. The latter assumes that changes in tax codes forces markets to adapt, so that rate hikes risk lowering revenues, and lowering rates in certain ways can produce a better revenue stream, especially over the long run. Republicans favor the latter analytical method, while Democrats insist that tax cuts “cost” revenue opportunities and cause deficits.

Which is correct? Well, the Washington Post reports on a lot of dynamic activity in advance of the fiscal cliff:

As lawmakers struggle to agree on a plan to avert the series of tax increases looming next year, many investors are taking preemptive action to get out of harm’s way.

Americans are moving to sell investment homes, off-load stocks, expand charitable donations and establish tax-sheltering gifts before the end of the year. Financial advisers and accountants say people are trying to avoid the higher taxes that will take effect in 2013 if Washington does not avert the “fiscal cliff.”

For the nation’s top earners, who as a group make a large share of their incomes through investment returns, those moves could have a major impact on their tax bills.

“We are seeing a lot of questions about what assets to sell,” said Debbie Haines, a partner at CST Group, a Reston accounting firm. “A lot of people are wanting to liquidate stocks that have a gain. A lot of people are harvesting their capital gains. There is also some concern that itemized deductions will be cut, and some people who are charitably inclined are thinking about making bigger donations this year.“

Also, with the tax laws covering gifts set to tighten significantly, several Washington area estate lawyers say they are facing a rush of people interested in establishing trusts that under current law allow a couple to protect more than $10 million in assets from the tax man. Impending changes in the law could reduce the gift exclusion to $1 million for an individual or $2 million for a couple.Of course, the Washington Post isn’t exactly a newcomer to dynamic analysis. On Friday, the Associated Press reported that the Post has decided to pay dividends this year instead of next to shield investors from the fiscal cliff:

The Washington Post Co. will pay its 2013 dividends before the end of this year to try to spare investors from anticipated tax increases.

The media and education company said Friday that its dividend of $9.80 per share is payable Dec. 27 to shareholders of record as of Dec. 17. The payout is instead of regular quarterly dividends next year.Washington Post is the latest company to move up its quarterly payout or issue a special end-of-year payment to protect investors from potentially having to pay higher taxes on dividend income starting in January.All of this comes in advance of the tax hikes that everyone is pretty sure will be coming. What will happen when those rate hikes take place — especially on capital gains, which drive later investment? Investors will be less willing to turn over that capital, since they will pay a higher price in taxes while the risk either remains the same or gets worse on putting the capital into new investments. The wealthy will seek more shelter rather than investment opportunities.

As the Post reports in its article, the people who don’t have that kind of flexibility are the middle- and working-class earners, whose income comes solely from wages earned by the opportunities driven by risk-taking behavior. Not only will that mean higher taxes, but fewer opportunities to earn money thanks to the depressing impact of tax hikes, which at the same time won’t deliver the kind of revenues promised by their proponents because of the market-behavior changes that even the Post demonstrates.

Dynamic analysis in this case predicts stasis in the Obamanomics stagnation.

Because Krugman is an incoherent idiot and Wesbury, agree or disagree, is not.

Indeed, it being a mystery to me why the market is as strong as it is, it seems to me that staying tapped into alternative views from solid folks such as Wesbury (who has a superior record as a prognosticator going back many years) is a good thing.

As for the forestalling discussed in the piece you post, I agree it is going on-- which makes the market's solidity all the more puzzling to me.

With apologies to David M. Gordon, I am not a prophet, nor do I profit. Instead of always wrong and never in doubt, I seem to be always wrong and always in doubt. I used to believe that the market was efficient, now I believe it can be wrong longer than I can stay solvent. My assumptions are shattered. Nothing makes sense.

"Because Krugman is an incoherent idiot and Wesbury, agree or disagree, is not."

Krugman is an award winner. Someday I will read his more serious academic works. As a columnist he is nut from my point of view. Deserves posting only to counter his view or be aware of what the others are reading.

Wesbury's context on the board I think is perfect. He posts good data, better than you find almost anywhere else. PP found defects in his housing sources. Mostly the objection is that he puts positive spin on some pretty dismal numbers, and here he gets called out for that.

Trade deficit is a misnomer and sometimes a contrary indicator. Both imports and exports are good in a free economy and they don't have to be identical. There are many other factors.

"...mystery to me why the market is as strong as it is..." - Likewise for me. But who knows about tomorrow or year end or 2013 unless there is some foundation of economic growth laid that we can't see.

Wesbury calls it the workhorse economy. I used to just say there are people pulling the wagon and people riding in it. Enough forces are still in place to keep trudging forward this far, but everyday we have more people riding and fewer people pulling. What could possibly go wrong?

Industrial production rose 1.1% in November coming in well above the consensus expected gain of 0.3%. Production is up 2.5% in the past year.Manufacturing, which excludes mining/utilities, rose 1.2% in November. Auto production increased 4.6% in November while non-auto manufacturing rose 0.9%. Auto production is up 16.6% versus a year ago while non-auto manufacturing is up 1.6%.

The production of high-tech equipment fell 0.2% in November and is down 1.6% versus a year ago.

Overall capacity utilization moved up to 78.4% in November from 77.7% in October. Manufacturing capacity use rose to 76.6% in November from 75.9% in October.

Implications: Production surged 1.1% in November, rising the most in two years and fully rebounding from October’s Sandy-related drop. Putting October and November together, production is up at a 2.5% annual rate in the past two months, the same growth rate as in the past year. Manufacturing boomed in November, growing 1.2%. The gain was led by auto production which increased 4.6%, the largest monthly gain since January. Expect continued gains over the next few months as consumers replace vehicles ruined by the storm. Manufacturing outside the auto sector – what we like to follow to reduce “statistical noise” – rose 0.9%, but is up only 1.6% from last year. This is consistent with a plow horse economy. Capacity utilization rose to 78.4% in November, the highest level since March, and still remains higher than the 20-year average of 77.7%. This means companies have an incentive to build out plant and equipment. Meanwhile, corporate profits and cash on the balance sheet show they have the ability to make these investments. However, if policymakers fail to resolve the “fiscal cliff” well into 2013, the risk of a mild recession would go up substantially. Our best guess is that some agreement will be made by very early in January, either a “bare-bones” agreement like the bill the Senate passed last July or a broader one. The Senate bill includes a one-year extension of income tax cuts for earnings below $250,000 per year, a capital gains and dividend tax rate of 20% (23.8% including the extra tax in the Obamacare bill on high-income tax payers), and a “patch” for the Alternative Minimum Tax for 2012. However, with so many issues – like the sequester, estate tax, and debt limit – left unaddressed, the two sides would be have to start bargaining again in January.

Personal income was up 0.6% in November, easily beating the consensus expected gain of 0.3%. Personal consumption was up 0.4%, matching consensus expectations. In the past year, personal income is up 4.1% while spending is up 3.5%.

Disposable personal income (income after taxes) was up 0.6% in November and 4.0% from a year ago. Gains in private wages & salaries as well as interest income led the way in November.

The overall PCE deflator (consumer inflation) was down 0.2% in November but up 1.4% versus a year ago. The “core” PCE deflator, which excludes food and energy, was unchanged in November and is up 1.5% in the past year.

After adjusting for inflation, “real” consumption increased 0.6% in November and is up 2.1% from a year ago.

Implications: After getting clobbered by Sandy in October, income and consumer spending rebounded sharply in November. Incomes increased 0.6% for November (+0.7% including upward revisions for prior months). The gains in the months ahead are not likely to be quite so strong but should continue. In the past year, incomes are up 4.1% and private-sector wages & salaries are up 4.3%. In other words, income gains are not artificially supported by government transfer payments. Led by durable goods like autos, consumer spending was up 0.4% in November (+0.5% including revisions to prior months) and is up 3.5% in the past year. “Real” (inflation-adjusted) spending was up 0.6% in November (+0.8% including revisions to prior months) and up 2.1% versus a year ago. One of the reasons real spending was so strong was that, consistent with the drop in the CPI for November, overall personal consumption inflation was negative as well, with prices falling 0.2%. This measure of inflation, known as the PCE deflator, is the Federal Reserve’s favorite measure of overall prices and is up only 1.4% versus a year ago, which is less than the Fed’s target of 2%. However, given the loose stance of monetary policy, look for inflation to move above the Fed’s target in 2013. Before today’s economic reports, we had been estimating a real GDP growth rate of only 0.5% for the fourth quarter; today’s data now have us tracking 1%. If we get a last minute political deal on the “fiscal cliff,” we expect real GDP growth in the 2.5% to 3% range next year. That includes boosts from farm inventory replenishment after this year’s drought, as well as Sandy-related rebuilding on the East Coast. However, if we fall over the cliff for a prolonged period and there is no deal at all, growth in 2013 is likely to be roughly half that pace with more weakness in the first half of the year.

New Orders for Durable Goods were Up 0.7% in November, Up 1.4% Including Revisions to October To view this article, Click Here Brian S. Wesbury - Chief Economist Bob Stein, CFA - Senior Economist Date: 12/21/2012

New orders for durable goods were up 0.7% in November (+1.4% including revisions to October), beating the consensus expected gain of 0.3%. Orders excluding transportation increased 1.6% (+1.7% including revisions to October), easily beating the consensus expected decline of 0.2%. Overall new orders are up 0.8% from a year ago, while orders excluding transportation are up 0.4%.New orders for durable goods were up in almost every major category in November, led by motor vehicles/parts and industrial machinery. The lone downward exception was aircraft.The government calculates business investment for GDP purposes by using shipments of non-defense capital goods excluding aircraft. That measure was up 1.8% in November (+2.5% including revisions to October). If these shipments are unchanged in December, they will be up at a 4.8% annual rate in Q4 versus the Q3 average.Unfilled orders were up 0.1% in November and are up 3.3% from last year.Implications: The plow horse economy continues to move forward. Orders for durable goods came in much better than expected in November as companies seem to be gaining more confidence. Although overall new orders were up only 0.7%, they were up 1.6% excluding the always volatile transportation sector. In particular, machinery orders, which fell rapidly this summer, were up 3.3% in November and have risen dramatically – at a 75.8% annual rate – in the past three months. Now, despite the summer’s weakness, machinery orders are up 1.1% from a year ago. Meanwhile, shipments of “core” capital goods, which exclude defense and aircraft, were up 1.8% in November and were revised up for last month. Core shipments usually fall in the first month of each quarter and then rebound in the last two months. That has not happened in the fourth quarter despite all the economic uncertainty that remains surrounding public policy. That uncertainty will continue in the near term as lawmakers try to hash out an agreement to avoid the “fiscal cliff.” If no deal is reached for a prolonged period, orders for durables are going to fall early in 2013 as the economy weakens, before rebounding later in 2013. If a fiscal deal is reached, we expect a continuation of the recent upward trend in orders and shipments. Monetary policy is loose, corporate profits and balance sheet cash are at record highs (earning almost zero interest), and the recovery in home building is picking up steam. All of these indicate more business investment ahead.

This eery piece follows the mortgage discussion, only larger and wider. Bonds are investments that gamble on both inflation and interest rates. Interest rates today are a quasi-government (Fed) manufactured product, not the result of aggregate savers and lenders finding an equilibrium. Inflation of our currency is happening today in front of our eyes; the price consequences, as of now, are not. A liberal friend forwarded this to me earlier. I responded to him: "Who is the buyer of this foolish investment? We are." (I gave him 3 links showing the Fed is buying 70% to 90% of our debt.) "When no one (else) buys these worthless bonds, it means we all just did. If balancing the budget is hard now, try doing it in 2017! " He responded, "That's right. Pretty extreme times."

HIGH AND LOW FINANCEReading Pessimism in the Market for BondsBy FLOYD NORRISPublished: December 27, 2012

“Certificates of Confiscation.”

In September 1981, during a lengthy bond bear market, Wall Street was telling The New York Times that bonds were a bad investment. A bull market soon followed.

Three decades ago, that was what some people said bonds really were. The interest the bond paid would not be enough, they said, to offset the declining value of dollars as inflation added up. The “real” — after-inflation — bond yield would be negative.

That was just as the great bull market in bonds began. Bonds were great investments, and the bond bears turned out to have been dead wrong.

Now we have come full circle. The government is selling bonds that are absolutely, positively guaranteed to not pay enough to offset inflation over the coming years. It is even possible that someone who bought a new Treasury security that will be issued on Monday will end up getting fewer dollars back than he or she invested — interest and principal combined — between now and when the bond matures in 2017.

The securities are inflation-protected Treasury notes. If inflation ticks up significantly over the coming years, investors will get back more dollars than originally invested. But not enough to come close to keeping up with inflation. If there is no inflation, they will get back less than they invested.

When those securities were auctioned last week, buyers agreed to accept a real yield of negative 1.496 percent. It takes a lot of pessimism — about the economy and the future of the United States — to think an investment certain to lose money is an investment worth making.

The great bear market in bonds, both corporates and governments, lasted 35 years, from 1946 to 1981. The bull market lasted about 30 years. A new bear market almost certainly has begun.

If that is true, those seeking a little income now by going out the yield curve will come to rue the decision. They will get the promised interest, but as market interest rates rise, the price of those bonds will decline and decline and decline.

On Oct. 26, 1981, which can be dated as the bottom of the great bond bear market, the yield on 30-year Treasury bonds rose to 15.21 percent. On that date, a Treasury bond issued in 1970 and scheduled to mature in 2000 was quoted at less than 56 percent of face value. It had a coupon of 7.875 percent, but that was not deemed enough to compensate investors for the risk.

At market extremes, it is often worth analyzing what has to be true for a given investment to be a good, or bad, value. Back in 1981, you had to assume that inflation would not only remain in double digits for decades, but that it would also continue to rise, for a newly issued Treasury bond to turn out to be a bad investment. Yet many investors assumed it would be. After all, a lot of people on Wall Street in 1981 could not remember a time when bonds were good investments.

A few weeks before rates peaked, Seth Glickenhaus, an experienced bond trader and head of Glickenhaus & Company, an investment advisory firm, spoke the conventional wisdom when he said, “Anyone who buys a bond today to hold for more than five years is out of his mind.”

Michael Gavin, the head of United States asset allocation for Barclays, pointed out this month that over the past 30 years an investor who stayed invested in American, or British, 10-year government bonds would have earned more than 5 percent a year over inflation.

“It does not require advanced market math to understand that returns like these are no longer remotely plausible,” he wrote. “But they say that fish don’t know that they live in water — until they are removed from it — and we wonder if some of the many market participants whose entire professional experience has been conditioned by the financial backdrop created by the bond market rally might underestimate some consequences of its termination.”

Even if rates stay where they are for the next five years, and investors collect the interest coupons, he said, “bonds will be transformed from wealth creators into wealth destroyers.”

Or at least they will be unless there is severe deflation. For that is the only situation that will allow today’s new long-term bonds to turn into good investments.

Is that possible? To think it is likely, you pretty much have to assume that economic growth is a thing of the past in both the United States and Europe. It is not an optimistic outlook.

Average weekly earnings – cash earnings, excluding benefits – were up 0.3% in December and up 2.1% from a year ago.

Implications: The headlines for today’s employment report were almost exactly what the consensus expected, showing continued modest improvement in the labor market. The details in the report were better news. Nonfarm payrolls rose 155,000 in December, versus an average of 153,000 in both 2011 and 2012. Meanwhile, private payrolls gained 168,000 while being revised higher for October and November. Including those revisions, private-sector payrolls were up 206,000. Given today’s technological advances, we should be doing much better, more like 300,000 jobs per month as in the 1990s. What’s holding us back from much faster gains is the huge increase in the size of government, particularly transfer payments, over the past several years. Civilian employment, an alternative measure of jobs that includes small-business startups, gained only 28,000 in December but was up 192,000 per month in 2012, faster than payroll growth and indicative of an acceleration in payroll growth in 2013. The unemployment rate was unrevised at 7.8% while the labor force grew by 192,000. In the past year, the labor force is up 1.4 million while the jobless rate is down 0.7 percentage points. The best news in today’s report was on hours and wages. Total hours worked were up 0.4% in December and 2% from a year ago. Average hourly earnings were up 0.3% in December and 2.1% from a year ago. As a result, total cash earnings (based on earnings and hours) are up 4.1% from a year ago (and about 2.3% when adjusted for inflation), so consumers have room to increase spending. In other recent news on the labor market, initial unemployment claims increased 10,000 last week to 372,000. The four-week average is 360,000. Continuing claims for regular state benefits were up 44,000 to 3.25 million. In other news, sales of autos and light trucks came in at a 15.4 million annual rate in December. Although 1% below the pace in November, vehicle sales beat consensus expectations and are up 13% from a year ago. The plow horse recovery continues.

10 charts that show growth in spite of the Obama assault on the economy. Much of it has already been posted on the board. Give credit to Scott who takes the time to explain how much better things would be with pro-growth policies. His charts are more honest than most in that they show current growth within the context of greater growth in earlier years.

Long Treasurys Wipe Out a Year's Worth of Yield in One Week .By PATRICK MCGEE

Long-term Treasurys, considered among the safest assets in the investment world, lost 3.07% of value in the early days of 2013—more than wiping away their annual 3% yield in one week.

The dynamic underscores what BlackRock calls "the danger in safety" and highlights the perils of buying even the best-rated investments in an era of rock-bottom rates.

"The first couple of days of the year have been a warning sign for interest rates," said Tim Gramatovich, co-manager of the AdvisorShares Peritus High Yield HYLD +0.18%exchange-traded fund.

After Congress found some common ground on taxes last week, assets perceived as risky soared, and safer investments lost value. That caused bond yields, which move inversely to price, to rise. An index of Treasury bonds that mature in 20 or more years, as calculated by Barclays, BARC.LN 0.00%fell over the first three sessions of 2013. Monday's small rise in Treasurys, pushing down yields, trimmed the losses, but it is still down 2.81%.

For cautious investors not willing to bet on corporate bonds or equities, handing cash to Uncle Sam is often an alternative. How much they lose when interest rates rise depends largely on the bonds' duration.

The general rule on duration is that, for every percentage point that interest rates rise, a bond or bond fund will lose the equivalent of its duration in price. A bond with a duration of five years will lose 5% for every percentage point that rates go up. Thus, bonds with longer durations are more exposed to this risk.

Lower-rated bonds are more insulated from rising interest rates, because the offsetting factor, the yield, is higher. For instance, long-term corporate bonds lost 1.24% of value last week, but, with a yield of 4.51%, the effects aren't as dramatic. Higher-rated bonds don't have that cushion.

Some investors expect the theme of rising rates to be repeated throughout the year, albeit at a slower pace. Treasury prices fell last week on a deal over the fiscal cliff that pulled money into stocks, although some say the looming debate over the U.S. debt ceiling could, ironically, add to demand for Treasurys as a safe haven if fears about a U.S. credit downgrade intensify as a result.

Treasurys also were hit last week by worries that the Federal Reserve could end its bond-buying program earlier than many investors expect. The central bank has become the largest single buyer of U.S. Treasurys through its so-called quantitative easing program.

"Last week is probably a fast-track of what will happen this year," said Wade Balliet, senior vice president at Bank of the West, a subsidiary of BNP Paribas BNP.FR +1.86%that manages $10 billion. "We anticipate rates going high this year, but not as rapidly as they climbed last week."

Indeed, a mid-December survey of the Federal Reserve's 21 primary dealers found the median forecast is for the 10-year yield to rise to 2.25% by the end of 2013, largely because they expect the economic recovery will accelerate in the second half of the year.

Monday, the benchmark 10-year yield fell for the first time in five sessions, losing 0.01 percentage point to 1.904% as its price rose 3/32.

Very funny and Goldberg has it about right. Of course Stewart is not really mocking leftism, just one bizarre idea by a leftist. Maybe in other shows, but here he is not mocking the idea that 16.4 trillion isn't enough debt and he isn't mocking the fact that the trillion dollar coin in concept is already our policy for financing our deficits; we are only borrowing back a fraction of the money we are printing.

In a different circumstance, can anyone imagine the Stewart type comedy shows if the trillion dollar coin proposal in lieu of honoring our debt limit had been put forward by a VP or Secretary of Treasury Sarah Palin?

Next week, Fourth Quarter Real GDP will be released. Our forecast of 0.9% annualized growth, if correct, will encourage the pessimists to continue fretting about the economy in the year ahead. But we will ignore that dour response. Beneath the surface of the report will be evidence that the plow horse economy is picking up some steam.If we are correct with our forecast, Q4 will be the weakest quarter of growth since early 2011 and it will be a noticeable dip from the 3.1% rate in Q3. Nonetheless, the headline will be misleading because the primary cause of the slowdown will be inventories.

The crop-damaging drought the US experienced this summer, which cut the amount of crops harvested in the fall, led to large drop in inventories. Meanwhile, after non-agriculture companies lifted inventories in Q3, many seem to have reversed that process during Q4.

We suggest looking at real final sales (real GDP excluding inventories), which we expect to grow at a more respectable 2.2% annual rate. If so, real final sales would also be up 2.2% in all of 2012, the fastest pace since 2007. More importantly, when we narrowly focus on consumer spending, business investment, and home building, we get a healthy growth rate of 3.4% in Q4. This leaves out government, inventories and trade.

We are still a far cry from the consistent rapid economic growth of the 1980s and 1990s, when public policy was moving in the direction of smaller government, but it’s nothing to sneer at and it certainly isn’t a sign of recession. Looking ahead, we see a modest acceleration of economic growth in 2013, the result of a loose monetary policy, the downstream effects of a housing recovery, and a replenishment of farm inventories, offsetting the negative effects of the recent tax hike.

Consumption: Sales of cars and light trucks were up at a 16% annual rate in Q4, while “real” (inflation-adjusted) retail sales ex-autos were up at a 2.6% rate. However, services make up about 2/3 of personal consumption and they grew at about a 1% rate. So far, it looks like real personal consumption of goods and services combined, grew at a 2.3% annual rate in Q4, contributing 1.6 points to the real GDP growth rate. (2.3 times the consumption share of GDP, which is 71%, equals 1.6.)

Business Investment: Business investment in equipment & software looks like it grew at a 5.5% annual rate in Q4 while commercial construction was unchanged. Combined, they grew at 4% pace, which should add 0.4 points to the real GDP growth rate. (4 times the business investment share of GDP, which is 10%, equals 0.4.)

Home Building: Construction activity is still relatively low compared to several years ago, so you have to be careful how you talk about this sector. What’s important to recognize is the growth rate for residential construction is fantastic. And it’s not just apartment buildings anymore. Single-family construction is rebounding sharply. Home building appears to have grown at a 28% annual rate in Q4, the fastest pace since the early 1980s. This translates into 0.7 points for the real GDP growth rate. (28 times the home building share of GDP, which is 2.5%, equals 0.7.)

Government: Military spending grew in Q4 but no more than it usually does. Meanwhile, state/local government construction is up only slightly from the prior quarter. On net, real government purchases shrank at about a 1% rate in Q4, which should subtract 0.2 percentage points from real GDP growth. (-1 times the government purchase share of GDP, which is 20%, equals -0.2).

Trade: At this point, the government has only reported trade data through November. On average, the “real” trade deficit in goods has grown compared to the Q3 average. As a result, we’re forecasting the trade sector subtracted 0.3 points from the real GDP growth rate.

Inventories: As we already discussed, this summer’s drought in the farm sector suppressed farm inventories this fall. Other companies appeared to slow the pace of inventory accumulation after a brief pick up in Q3. We are assuming inventories cut 1.3 points from the real GDP growth rate in Q4.

Add-em-up and you get 0.9% real GDP growth for Q4. This headline may scare some investors away. But if you focus on the details, you’ll see slightly smoother skies ahead.

There's a funny thing about the estimated $1.7 trillion that American companies say they have indefinitely invested overseas: A lot of it is actually sitting right here at home.

Some companies, including Internet giant Google Inc., GOOG +6.44%software maker Microsoft Corp. MSFT +1.25%and data-storage specialist EMC Corp., EMC +0.72%keep more than three-quarters of the cash owned by their foreign subsidiaries at U.S. banks, held in U.S. dollars or parked in U.S. government and corporate securities, according to people familiar with the companies' cash positions.

In the eyes of the law, the Internal Revenue Service and company executives, however, this money is overseas. As long as it doesn't flow back to the U.S. parent company, the U.S. doesn't tax it. And as long as it sits in U.S. bank accounts or in U.S. Treasurys, it is safer than if it were plowed into potentially risky foreign investments.

In accounting terms, the location of the funds may be just a technicality. But for people on both sides of the contentious debate over corporate-tax reform, the situation highlights what they see as the absurdity of rules that encourage companies to engage in semantic games, legal gymnastics and inefficient corporate-financing methods to shield profits from U.S. taxes.

The cash piling up at the nation's biggest corporations will get renewed attention in the weeks ahead, as companies report their fourth quarter and 2012 earnings. Tuesday's reports included updates from Google, which saw its stockpile of cash increase to $48.1 billion from $44.6 billion a year earlier, as well as results from Johnson & Johnson JNJ +0.18%and DuPont Co. DD -0.42%The fact that much of the money already is in the U.S. also undermines a central argument made by companies seeking tax relief to bring home money they have earned abroad, tax experts and lawmakers say: That the cash is languishing overseas when it could be invested to the benefit of the U.S. economy.

Edward Kleinbard, a professor at the University of Southern California's Gould School of Law and a former chief of staff for Congress's Joint Committee on Taxation, said there is a misperception that companies' excess cash is inaccessible, "somehow held in gold coins and guarded by Rumpelstiltskin."

"If it is a U.S.-dollar asset, that means ultimately it is in the U.S. economy in some fashion," he adds. "Where it is not is in the hands of the firm's shareholders."

The U.S. is the only major economy whose tax authorities claim a share of a domestic company's profits no matter where those profits are earned. But auditors don't require the companies to account for possible taxes on foreign earnings as long as they declare that the funds are permanently invested overseas. The upshot: American companies have a strong incentive to find ways of earning most of their profit overseas and keeping it in the hands of foreign units.

Recently the Securities and Exchange Commission has pressed companies to disclose how much tax they would owe if those funds were transferred to the U.S. parent. The idea is to give shareholders a better picture of how much cash would be available if the funds were repatriated.

U.S. companies are lobbying Congress to replace the current corporate-tax system with one that would tax only their domestic profits. Barring that, some say they would accept a tax on their repatriated earnings that is below the country's current corporate-tax rate of 35% so they could use the funds to pay dividends, buy back shares or otherwise put it to work in the U.S.

Out of EMC's $10.6 billion in cash holdings at the end of September, $5.1 billion was held overseas, according to its regulatory filings. Physically, however, more than 75% of these foreign earnings were stashed in the U.S. or in U.S. investments, according to a 2011 Senate report, whose figures the company confirmed.

"One of the major reasons that U.S. companies' foreign subsidiaries reinvest earnings in U.S.-dollar-denominated investments is to avoid gains and losses from changes in foreign-exchange rates," EMC spokeswoman Lesley Ogrodnick wrote in an emailed response to questions about the company's cash holdings.

EMC isn't alone. About 93% of the $58 billion in cash held by Microsoft's foreign subsidiaries is invested in U.S. government bonds, U.S. corporate bonds and U.S. mortgage-based securities, according to SEC filings. Most of that is in accounts in the U.S., according to a person familiar with the matter. In total, Microsoft had a cash stockpile of $66.6 billion, according to its filings.

The funds held by Microsoft's foreign subsidiaries are "deemed to be permanently reinvested in foreign jurisdictions," the company said in its filings. "We currently do not intend nor foresee a need to repatriate these funds."

Most of the $29.1 billion in cash and investments that Google said in an October securities filing that it plans to "permanently reinvest" outside the country is held in accounts or investments in the U.S. The same is true for most of the foreign earnings of software maker Oracle Corp., ORCL +0.19%according to the Senate report.

"If you are a U.S. company, you would have a bias to leave it in dollars, rather than taking the foreign-exchange exposure," said Fredric G. Reynolds, the former chief financial officer of CBS Corp. "No CFO wants to miss" an earnings estimate "because you happened to take a foreign-exchange hit," he said.

Sizable U.S.-dollar accounts are often owned by U.S. companies' foreign subsidiaries in tax havens like Ireland, the Cayman Islands and Singapore. But the accounts ultimately are U.S. accounts, regardless of where they are opened; a foreign bank typically will hold dollar deposits in a so-called correspondent bank in the U.S.

"The balances are in the U.S., but they are controlled from outside the U.S.," said Thomas Deas, vice president and treasurer of Philadelphia-based chemical producer FMC Corp. FMC -0.60%and chairman of the National Association of Corporate Treasurers.

Auditors and the SEC expect companies to account for a possible tax hit if there is any risk their subsidiaries might one day pay funds from foreign earnings to the U.S. parent. Few companies provide for that possibility, however.

Getting around it is simple: a company officer, typically the CFO or the treasurer, declares to the company's auditors that the funds have been permanently or indefinitely invested overseas. Auditors generally won't challenge the declaration, financial experts say, as long as a company's behavior is consistent and it doesn't repeatedly repatriate funds earmarked for foreign investments.

There is little reason not to formally commit funds overseas. Foreign markets offer the best growth prospects for many U.S. companies, and the funds may be needed there to build factories, develop new products or make acquisitions. Plus, the designation can be changed in an instant if the company is prepared to accept the tax bite. United Technologies Corp., UTX +0.42%for instance, used $4 billion of such "permanently" reinvested funds held by foreign subsidiaries to help pay for last year's acquisition of Goodrich Corp.

Companies say the U.S. corporate tax rate is so high that it doesn't make financial sense to bring more cash back than necessary. Even if much of the money already is here and available to be lent out by U.S. banks, companies argue that it isn't available to them to use as they please, such as distributing it to shareholders through dividends and buybacks.

Many executives still hold out hope for a broad overhaul of the corporate tax code. If lawmakers do take up the matter, figuring out how to collect taxes on earnings accumulated outside of the U.S. is expected to be front and center. The challenge would be in devising a system that raises revenue by setting the rate low enough that companies opt to pay the tax rather than continue to pile up an estimated $300 billion a year beyond Uncle Sam's reach.

The Senate's Permanent Subcommittee on Investigations looked into the issue in 2011 and concluded a temporary tax break on foreign earnings wasn't warranted. "The presence of those funds in the U.S. undermines the argument that undistributed accumulated foreign earnings are 'trapped' abroad," the committee said in its report.

Even so, the repatriation issue has distorted companies' capital structures, said Alan Shepard, an analyst at Madison Investment Advisors, which manages about $16 billion in assets. In some cases companies could lower their debt if they repatriated their cash, but don't because of the tax consequences, he said. "And the money is effectively just across the street here in the U.S."

Oracle derives about half of its revenue from the U.S. but keeps more than three-quarters of its cash and short-term investments—or $26 billion—in the hands of its foreign subsidiaries.

During its 2012 fiscal year, the company said it "increased the number of foreign subsidiaries in countries with lower statutory rates than the rate used in the United States, the earnings of which we consider to be indefinitely reinvested outside the United States."

If those funds were brought home and subject to U.S. income tax, Oracle estimated it could owe about $6.3 billion at the end of its fiscal year in May.

Low interest rates at home have allowed U.S. companies to borrow cheaply, helping them avoid tapping their foreign-held cash. Late last year Oracle raised $5 billion in its first debt sale in two years. It is paying an interest rate roughly two-thirds of a percentage point above Treasurys for the 10-year bonds, about 2.5% at the time. The company said the proceeds could be used to buy back stock, repay debt or pay for acquisitions.

Wall St. is full of theories attempting to explain price movement after the fact or predict price movement before it happens. The Dow Theory is one such theory, but for reasons discussed below, I believe the theory's relevance is long past, and in today's form, is utter garbage.

Generally speaking, the Dow Theory attempts to gauge the health of the economy using the movement of the Dow Industrials and the Dow Transports. More specifically it states the movement of the Industrials and the Transports must confirm each other or a trend change is likely to take place.

The Industrials make products; the Transports ship products. If the Industrials make a new high but the Transports do not, it's a sign companies are making products but not shipping them - not good. If the Transports makes a new high but the Industrials does not, it's a sign products are being shipped, but companies are cutting back on production - also not good. The theory makes sense - that the movement of one must confirm the other or else the divergence signals a reversal - but it also makes many assumptions. And it's these incorrect assumptions that render the theory nothing more than something technical analysts and newsletter writers use to sell "stuff" to the public.

Here are my reasons the Dow Theory is useless today.

1) The Dow Jones Industrial Average is not an industrial average The first Dow Index was comprised of industrial companies that made physical products, so the movement of the average was a pretty good indicator of products being produced. But this isn't the case today because many Dow components don't make anything.

JP Morgan, Bank of America, American Express, AT&T, Verizon, Travelers, UnitedHealth Group - these companies do billions of dollars of business every year without making or shipping a single product. Even IBM is mostly a services company, and although Microsoft can put their software on CDs and ship them, this isn't how the bulk of their revenue is generated.

So, the Dow isn't an industrial average anymore because many companies make billions of dollars without relying on the transports for shipping. Right here, the link between the two indexes breaks down.

If the Dow Theory assumes industrial companies make products and the transports ship them, the entire theory breaks down when non industrial companies were added to the Dow.

2) The Dow Industrials and Dow Transports are price weighted.

The theory assumes the prices quoted at the end of every day are an accurate reflection of the stocks that comprise each index, but because of the way the indexes are calculated, an argument can be made this isn't the case.

Price-weighting means the influence a stock has on the movement of the parent index is directly proportional to the stock's price, i.e. higher-priced stocks have a greater influence on the index's movement than lower-priced stocks. This means Chevron (CVX) has greater influence than ExxonMobil (XOM) even though XOM is almost twice as big.General Electric (GE) is the fifth largest Dow stock but because it's the sixth cheapest, its influence is underweighted. Microsoft (MSFT) is four times bigger than Caterpillar (CAT), but since CAT is three-and-a-half times more expensive, it's much more influential. UPS (UPS) is twice as big as FedEx (FDX), but since FDX is more expensive, it exerts a greater force on the parent index.

Even if the Dow Industrials only contained industrial companies, it can be argued that permitting the smaller stocks to "do more of the talking" results in an index that isn't a true reflection of the economy's health.

Because the indexes are price-weighted and do not consider market cap or other variables, they are calculated such that the results aren't a true reflection of "what's going on."

3) The theory does not consider volume.

Volume in the market equates to votes. The more volume, the more traders/investors are in favor of the price move. Basic technical analysis says volume must confirm a move, but the Dow Theory, as it's interpreted today, makes no mention of volume.

At the time of this writing, JP Morgan (JPM) and DuPont (DD) were trading at the approx. the same level; so generally speaking, they have the same influence on the Industrials. This means, on any given day, if DD is up 20 cents and JPM is down 20 cents, the net effect would be a wash because the movement of the two stocks would cancel each other out. But shouldn't one consider the fact that JPM trades 23 million shares/day while DD trades only 6 million?

At $45, $1.04 billion worth of JPM stock will change hands but only $270 million will change hands with DD. Equal and opposite movements of each stock should not cancel each other out. JPM should have more influence because more "money" is traded, but that's not the case.

Because the calculations of the indexes do not consider volume or the amount of dollars that change hands, the movement of the Averages is not a true assessment of the "voting" that is taking place.

4) Inefficiencies in shipping blur the purity of the theory.

The original Dow Transports were all railroads which transported massive quantities of goods. This resulted in a fairly fixed and low per-unit shipping charge. If the transports were bid up, very likely more products were being shipped. But this isn't the case today because the per-unit shipping charge has increased dramatically due to our inefficient shipping methods.

Instead of having a truckload of widgets shipped to a store (at a cost of $0.25 each), an individual widget can now be shipped directly to your mailbox for $5. This works to increase the profits for the transports, which is then reflected in higher stock prices for the transports, but isn't necessarily indicative of increased business for the producers.And what about the resale of products? A single item may be shipped several times; a $25 book may accrue $20 in shipping charges over time. Rallying transport stocks are supposed to suggest economic growth via the shipping of products, but this isn't the case when the same item is inefficiently shipped over and over.

The inefficient manner in which products are shipped messes up the purity of the theory. A strong transports group isn't necessarily a sign of business expansion.

5) Wal-Mart ships its own products.

Wal-Mart is the largest retail store in the world, so if business is going well, it will be reflected in the Transports Average because, after all, many boats, trucks and trains are used to get their products to market, right?

Wrong!

Wal-Mart ships most of its own goods. They have more than 5,600 tractor trailers, 6,900 truck drivers and 60 distribution centers in 28 US states. But even though Wal-Mart is technically one of the world's largest shipping companies, it's not a component of the Dow Transports. Is the Dow Transports a true reflection of the movement of products if the largest retail store in the world can ship hundreds of billions of dollars worth of goods but not have this movement reflected in the Transports Average?

The Dow Transports is not a good reflection of the movement of products because it doesn't take into consideration the movement of products flowing through Wal-Mart.

6) The theory does not take into consideration stock splits.

This is related to item #2 above. Since the indexes are price-weighed, the exact time a stock splits will greatly influence whether an index makes a new high or low. Doing a 2-for-1 or 3-for-1 stock split doesn't change anything about a company. The company is still valued the same; the dividend yield is the same; earnings per share is still the same; business has not increased or decreased. There is no material change in the company other than the stock price. But the company then has much less influence on the movement of its parent index, and if the split takes place at exactly the "wrong time," it could influence whether the parent index makes a higher high or lower low.

Stocks splits are a marketing tool companies use to tinker with their stock prices. The fact that this activity actually influences the movement of the indexes has to make you wonder if accurate readings of the indexes are possible.

7) Other

There are other reasons such as the fact that the transports often make money via fuel surcharges, so a rallying stock is not a guarantee the underlying company is shipping more products.

KEY TAKEAWAY

Wal-Mart can ship billions of dollars in products and have no influence on the movement of the Transports. Massive companies like Microsoft have much less influence than much smaller companies like DuPont. Heck, the theory breaks down right at the beginning when one realizes the Dow Industrials isn't even an industrial average, and it breaks down even further when one considers how the indexes are calculated in the first place.

Sorry, the Dow Theory doesn't work on paper for the reasons explained above, and it doesn't work in practice (beyond the scope of this write-up).

Just as many of the economic numbers released by the government were invented solely so analysts could write reports and sell "stuff" and promote "things" to the public, the Dow Theory is nothing more than something for technical analysts and newsletter writers to talk about so they can sell more "stuff" because if you actually think about it, the Dow Theory is of little use today.

New orders for durable goods were up 4.6% in December (+4.4% including revisions to November), easily beating the consensus expected gain of 2.0%. Orders excluding transportation increased 1.3% (+1.0% including revisions to November), beating the consensus expected gain of 0.8%. Overall new orders are up 0.2% from a year ago, while orders excluding transportation are down 2.8%.New orders for durable goods were up in almost every major category in December, led by defense aircraft, civilian aircraft and primary metals. The lone downward exception was electrical equipment.The government calculates business investment for GDP purposes by using shipments of non-defense capital goods excluding aircraft. That measure was up 0.3% in December (+0.5% including revisions to November). These shipments were up at a 5.2% annual rate in Q4 versus the Q3 average.Unfilled orders were up 0.8% in December and are up 2.3% from last year.Implications: The plow horse economy continues to move forward. Orders for durable goods came in much better than expected in December as companies look to be gaining more confidence. Overall new orders boomed 4.6% driven by strong gains in the transportation sector particularly in aircraft, but are only up 0.2% from a year ago. If you exclude the always volatile transportation sector, orders were still up a solid 1.3%. Meanwhile, shipments of “core” capital goods, which exclude defense and aircraft, were up 0.3% in December and were revised up for last month. Core shipments, which the government uses to calculate business investment for GDP were up at a 5.2% annual rate in Q4 verses the Q3 average. Core shipments usually fall in the first month of each quarter and then rebound in the last two months. This did not happen in Q4, as these core shipments actually increased in each of the past three months. This has only happened one other time in the past five years! A great sign, especially with all the uncertainty businesses had to deal with towards the end of 2012 in regards to the “fiscal cliff.” Now that a fiscal deal is reached, we expect a continuation of the recent upward trend in orders and shipments. Monetary policy is loose, corporate profits and balance sheet cash are at record highs (earning almost zero interest), and the recovery in home building is picking up steam. All of these indicate more business investment ahead. In other news this morning, pending home sales, which are contracts on existing homes, fell 4.3% in December. Given this data, expect a small decline in existing home sales in January.

US debt headed toward 200 percent of GDP even after 'fiscal cliff' deal

By Vicki Needham - 01/29/13 12:15 PM ET

The nation's long-term fiscal outlook hasn't significantly improved following the recent agreement between Congress and the White House over tax and spending issues, according to a new analysis.

The "fiscal cliff" deal, combined with the debt-limit agreement of August 2011, only slightly delays the United States reaching debt-to-gross domestic product levels that would damage the economy and risk another fiscal crisis, according to a report from the Peter G. Peterson Foundation released on Tuesday.

The agreement "may have prevented the immediate threats that the fiscal cliff posed to our fragile economic recovery, but we haven’t remotely fixed the nation’s debt problem," said Michael A. Peterson, president and COO of the Peterson Foundation.

"The primary goal of any sustainable fiscal policy is to stabilize the debt as a share of the economy and put it on a downward path, and yet our nation is still heading toward debt levels of 200 percent of GDP and beyond," he said.

The report concludes that the recent round of deficit-reduction measures won't make major improvements because they fail to address most of the major contributors to the debt and deficit, including rapidly rising healthcare costs.

The analysis suggests that lawmakers take action quickly to ensure that the nation is on a sustainable fiscal path.

At a House Ways and Means Committee hearing last week, lawmakers and budget experts agreed that rising healthcare costs, such as Medicare, must be addressed this year as part of efforts to overhaul the tax code and entitlement programs.

"Until spending in those areas is reduced, tax revenues are increased, or policymakers implement a combination of both, the United States will continue to have a severe long-term debt problem," the report said.

"Reforms should be implemented gradually, and fiscal improvements must be achieved before our debt level and interest payments are so high that sudden or more draconian reforms are required to avert a fiscal crisis."

The latest deal that stopped income tax increases for those making $400,000 a year or less may have only improved the burgeoning debt situation by a year.

Scheduled spending cuts from the 2011 budget deal, combined with the fiscal cliff agreement, put the debt on track to reach 200 percent of GDP by 2040, five years later than was projected prior to the passage of the two deals.

The recent deficit-reduction measure gave the nation an additional year before hitting that 200 percent threshold, the report showed.

Sequestration does not improve the outlook much, either.

Even if the budget sequester is fully implemented, federal debt would still reach 200 percent of GDP within about 28 years.

On top of that, the debt will continue to grow between now and 2022, and will accelerate significantly after that.

Debt is now projected to grow from 72 percent of GDP in 2012 to 87 percent in 2022, down only slightly from the 90 percent that was estimated before passage of the most recent deal.

Many economists suggest keeping debt at or below 60 percent of GDP, with research showing that economic growth slows for countries that have debt levels exceeding 90 percent of economic growth.

"Americans shouldn’t be under any false impression that our debt problems are behind us," Peterson said.

"And because it takes years to implement policies fairly and gradually, we need to make decisions now, before we are forced by markets to take severe action that hurts our economy and our citizens."

Who knew... that if you choose anti-growth policies at every decision point, at some point you will have no growth. Even zero growth against this policy mix shows the amazing resilience of the American economy. I wonder what shock in the 4th quarter (Nov. 6) could have sent this plowhorse momentum into a tailspin... Any lesser country would have collapsed by now. I don't get the part of 'shock', 'surprise' and 'unexpected' that mixes into the coverage.

If the numbers hold up to revisions and if it contracts a second quarter in a cold winter that has one month already gone, they won't call it a recession, they will call it The _____ Recession, and the middle name won't be Bush.

The first estimate for Q4 real GDP growth is -0.1% at an annual rate, much lower than the 1.1% the consensus expected. Real GDP is up 1.5% from a year ago.The largest negative drags on the Q4 real GDP growth rate, by far, were government and inventories, which subtracted a combined 2.6 points.Personal consumption, business investment, and home building were all positive in Q4, growing at a combined rate of 3.4% annualized.The GDP price index increased at a 0.6% annual rate in Q4. Nominal GDP – real GDP plus inflation – rose at a 0.5% rate in Q4 and is up 3.3% from a year ago.Implications: As we said in last week’s MMO: ignore the GDP headline, which was likely to be weak, but misleading. As it turns out, the headline was even weaker than we thought, coming in (slightly) negative for the first time since 2009 and lower than any forecast from the 83 groups making a prediction. We thought inventories would subtract 1.3 points from the GDP growth rate and got that exactly right; but government purchases also subtracted 1.3 points from the growth rate of real GDP, due to the largest drop in defense (relative to GDP) since the wind-down in Vietnam in 1973. The reason the real GDP contraction at a 0.1% annual rate is misleading is that the key components of GDP – personal spending, business investment, and home building – were all rising and came in at a combined 3.4% annual growth rate, exactly as we forecast. Reductions in inventories and government purchases may hurt in the short run, but looking ahead to 2013 we think these cuts are a positive: lower inventories mean more showrooms and shelves to be stocked; less government means lower deficits and the potential for lower taxes (or fewer future tax hikes). For now, we maintain our forecast that real GDP will grow in the 2.5% to 3% range in 2013, but think the risk of an upside surprise modestly outweighs risks to the downside. Despite a slight contraction in real growth and soft nominal GDP growth of 0.5%, these data still don’t justify the current round of quantitative easing. Nominal GDP is still up 3.3% in the past year, much too fast for a short-term interest rate target near zero. In other news today, the ADP employment index showed a private payroll gain of 192,000 in January. As a result, we are raising our forecast for Friday’s official employment report to a 160,000 gain in nonfarm payrolls. On the housing front, the Case-Shiller index, a measure of home prices in 20 major metro areas, showed a 0.6% gain in November and is up 5.5% in the past year. Recent price gains are led by San Diego, San Francisco, Atlanta, and Las Vegas.

So other than the offsetting factors that brought it to zero, we had 3.4% growth. In a mixed results, zero growth quarter, Wesbury is able to point to things that went up. Sounds like cherry picking. Next quarter I expect good growth too, except for all those one-time things that keep bringing it back to zero.

If we would start by admitting the 1.1% expectation is essentially nothing, then the zero result might not be so shocking.

“Right now there has been so much intervention and manipulation by central banks to create an atmosphere of financial repression, artificially low and suppressed interest rates, that the stock of debt, so far, has been serviceable. It’s been serviceable because interest rates are so unbelievably low.

This is not a natural condition. This is what investors need to understand. This is not a natural state of the world. And as we return, which we ultimately will, to a more normal state of the world, once again we will be staring at a very high likelihood of a global financial meltdown.

The only way that could be avoided would be an actual acceleration of the money printing that’s already taking place, and I don’t have to tell you what that would do to the price of gold.”

Eric King: “The governments are running a Ponzi scheme. We have the insolvent financing the insolvent in Europe. This goes to your point that there is going to be another meltdown in front of us. What could set this (financial system) into meltdown mode?”

Kaye: “All we need is for the Fed to live up to its promise that it has an exit strategy. I’m here to say that they don’t have an exit strategy. There isn’t an exit. A return to a normalization of interest rates, a withdrawal by the Fed and other central banks in their efforts to monetize debt and artificially suppress interest rates, as soon as that ceases, the system itself will freeze up just as it did a few years ago.

The reason it will freeze up is the system can’t handle anything close to what would be considered historically normal interest rates. The stock of debt globally at that stage cannot be serviced. So the system, inevitably, will break down. The problem this time is likely to be much worse than it’s ever been in the past because the debt bubble has never been this big at any point in the past.”

Personal income was up 2.6% in December, easily beating the consensus expected gain of 0.8%. Personal consumption was up 0.2%, coming in below the consensus expected 0.3%. In the past year, personal income is up 6.9% while spending is up 3.6%.Disposable personal income (income after taxes) was up 2.7% in December and up 7.0% from a year ago. The gain in December was mostly due to dividends.The overall PCE deflator (consumer inflation) was unchanged in December but up 1.3% versus a year ago. The “core” PCE deflator, which excludes food and energy, was also unchanged in December but is up 1.4% in the past year.After adjusting for inflation, “real” consumption increased 0.2% in December and is up 2.2% from a year ago.Implications: Personal income boomed 2.6% in December (3% including upward revisions to November), the largest monthly gain since December 2004. Like in 2004, the gain was due to dividends. Back then, Microsoft paid a large special dividend; this time around, many companies shifted dividends into December so shareholders could avoid higher taxes in 2013. Given the tax hike on ordinary income, we would have expected a spike in private-sector wages & salaries as well. Back in late 1992, private wages & salaries jumped 7.2% in December in anticipation of higher taxes under President Clinton. This time around, private wages & salaries were up 0.8%, a strong gain, but nowhere near 1992. Regardless, due to the spike in overall income, expect a large decline next month to bring us back toward a more plow-horse-like trend. Led by durable goods like autos, consumer spending was up 0.2% in December and is up 3.6% in the past year. “Real” (inflation-adjusted) spending was also up 0.2% in December and up 2.2% versus a year ago. Personal consumption prices were flat in December. This measure of inflation, known as the PCE deflator, is the Federal Reserve’s favorite for overall prices and is up only 1.3% versus a year ago, less than the Fed’s target of 2%. However, given the loose stance of monetary policy, look for inflation to move above the Fed’s target in 2013. In other news this morning, new claims for jobless benefits rose 38,000 last week to 368,000. Continuing claims for regular state benefits increased 22,000 to 3.20 million. These figures are consistent with our forecast of a nonfarm payroll gain of 160,000 for January. The Chicago PMI, which measures manufacturing sentiment in that region, increased to 55.6 in January from 50.0 in December. Despite yesterday’s negative report on Q4 real GDP growth, we are nowhere close to recession.

The ISM manufacturing index rose to 53.1 in January from 50.2 in December, coming in well above the consensus expected 50.7. (Levels higher than 50 signal expansion; levels below 50 signal contraction.)The major measures of activity were mostly higher in January and all remain above 50. The new orders index rose to 53.3 from 49.7 and the production index increased to 53.6 from 52.6 while the employment index gained to 54.0 from 51.9. The supplier deliveries index ticked down slightly to 53.6 from 53.7.The prices paid index rose to 56.5 in January from 55.5 in December.

Implications: The new year starts with a solid report on manufacturing sentiment as the ISM manufacturing index surprised to the upside in January rising to 53.1, the best reading since April. According to the Institute for Supply Management, a level of 53.1 is consistent with real GDP growth of 3.4%. More likely, today’s data is consistent with what will be roughly 2.5% real GDP growth in Q1. We expect manufacturing to continue to improve over the coming months as the negative effects of policy uncertainty and Sandy continue to subside. The best news in today’s ISM report was that the employment index rose, coming in at 54.0, the highest level since June. Also, the new orders index showed expansion again and moved to the highest level since May. Despite the softness shown in some regional manufacturing surveys, the overall manufacturing sector looks to be doing just fine. On the inflation front, the prices paid index rose to 56.5 in January from 55.5 in December. We expect prices, and inflation, to continue to gradually move higher. In other news this morning, construction increased 0.9% in December (+2.2% including revisions for prior months). The gain in December was due to home building (particularly home improvements) as well as commercial construction (led by power plants, manufacturing facilities, and higher education buildings). Home building is up 24% from a year ago while commercial construction is up 8%. Look for continued gains in these categories in the year ahead.

We Are All Going To Die From Inflation Says Bill GrossPosted by Jeff Carter on February 3rd,

They say that time is money. What they don’t say is that money may be running out of time.

There may be a natural evolution to our fractionally reserved credit system that characterizes modern global finance. Much like the universe, which began with a big bang nearly 14 billion years ago, but is expanding so rapidly that scientists predict it will all end in a “big freeze” trillions of years from now, our current monetary system seems to require perpetual expansion to maintain its existence. And too, the advancing entropy in the physical universe may in fact portend a similar decline of “energy” and “heat” within the credit markets. If so, then the legitimate response of creditors, debtors and investors inextricably intertwined within it, should logically be to ask about the economic and investment implications of its ongoing transition.

But before mimicking T.S. Eliot on the way our monetary system might evolve, let me first describe the “big bang” beginning of credit markets, so that you can more closely recognize its transition. The creation of credit in our modern day fractional reserve banking system began with a deposit and the profitable expansion of that deposit via leverage. Banks and other lenders don’t always keep 100% of their deposits in the “vault” at any one time – in fact they keep very little – thus the term “fractional reserves.” That first deposit then, and the explosion outward of 10x and more of levered lending, is modern day finance’s equivalent of the big bang. When it began is actually harder to determine than the birth of the physical universe but it certainly accelerated with the invention of central banking – the U.S. in 1913 – and with it the increased confidence that these newly licensed lenders of last resort would provide support to financial and real economies. Banking and central banks were and remain essential elements of a productive global economy.

But they carried within them an inherent instability that required the perpetual creation of more and more credit to stay alive. Those initial loans from that first deposit? They were made most certainly at yields close to the rate of real growth and creation of real wealth in the economy. Lenders demanded that yield because of their risk, and borrowers were speculating that the profit on their fledgling enterprises would exceed the interest expense on those loans. In many cases, they succeeded. But the economy as a whole could not logically grow faster than the real interest rates required to pay creditors, in combination with the near double-digit returns that equity holders demanded to support the initial leverage – unless it was supplied with additional credit to pay the tab. In a sense this was a “Sixteen Tons” metaphor: Another day older and deeper in debt, except few within the credit system itself understood the implications.

Economist Hyman Minsky did. With credit now expanding, the sophisticated economic model provided by Minsky was working its way toward what he called Ponzi finance. First, he claimed the system would borrow in low amounts and be relatively self-sustaining – what he termed “Hedge” finance. Then the system would gain courage, lever more into a “Speculative” finance mode which required more credit to pay back previous borrowings at maturity. Finally, the end phase of “Ponzi” finance would appear when additional credit would be required just to cover increasingly burdensome interest payments, with accelerating inflation the end result.

Minsky’s concept, developed nearly a half century ago shortly after the explosive decoupling of the dollar from gold in 1971, was primarily a cyclically contained model that acknowledged recession and then rejuvenation once the system’s leverage had been reduced. That was then. He perhaps could not have imagined the hyperbolic, as opposed to linear, secular rise in U.S. credit creation that has occurred since as shown in Chart 1. (Patterns for other developed economies are similar.) While there has been cyclical delevering, it has always been mild – even during the Volcker era of 1979-81. When Minsky formulated his theory in the early 70s, credit outstanding in the U.S. totaled $3 trillion. Today, at $56 trillion and counting, it is a monster that requires perpetually increasing amounts of fuel, a supernova star that expands and expands, yet, in the process begins to consume itself. Each additional dollar of credit seems to create less and less heat. In the 1980s, it took $4 of new credit to generate $1 of real GDP. Over the last decade, it has taken $10, and since 2006, $20 to produce the same result. Minsky’s Ponzi finance at the 2013 stage goes more and more to creditors and market speculators and less and less to the real economy. This “Credit New Normal” is entropic much like the physical universe and the “heat” or real growth that new credit now generates becomes less and less each year: 2% real growth now instead of an historical 3.5% over the past 50 years; likely even less as the future unfolds.

Not only is more and more anemic credit created by lenders as its “sixteen tons” becomes “thirty-two,” then “sixty-four,” but in the process, today’s near zero bound interest rates cripple savers and business models previously constructed on the basis of positive real yields and wider margins for loans. Net interest margins at banks compress; liabilities at insurance companies threaten their levered equity; and underfunded pension plans require greater contributions from their corporate funders unless regulatory agencies intervene. What has followed has been a gradual erosion of real growth as layoffs, bank branch closings and business consolidations create less of a need for labor and physical plant expansion. In effect, the initial magic of credit creation turns less magical, in some cases even destructive and begins to consume credit markets at the margin as well as portions of the real economy it has created. For readers demanding a more model-driven, historical example of the negative impact of zero based interest rates, they have only to witness the modern day example of Japan. With interest rates close to zero for the last decade or more, a sharply declining rate of investment in productive plants and equipment, shown in Chart 2, is the best evidence. A Japanese credit market supernova, exploding and then contracting onto itself. Money and credit may be losing heat and running out of time in other developed economies as well, including the U.S.

Investment Strategy

If so then the legitimate question is: How much time does money/credit have left and what are the investment consequences between now and then? Well, first I will admit that my supernova metaphor is more instructive than literal. The end of the global monetary system is not nigh. But the entropic characterization is most illustrative. Credit is now funneled increasingly into market speculation as opposed to productive innovation. Asset price appreciation as opposed to simple yield or “carry” is now critical to maintain the system’s momentum and longevity. Investment banking, which only a decade ago promoted small business development and transition to public markets, now is dominated by leveraged speculation and the Ponzi finance Minsky once warned against.

So our credit-based financial markets and the economy it supports are levered, fragile and increasingly entropic – it is running out of energy and time. When does money run out of time? The countdown begins when investable assets pose too much risk for too little return; when lenders desert credit markets for other alternatives such as cash or real assets.

Visible first signs for creditors would logically be 1) long-term bond yields too low relative to duration risk, 2) credit spreads too tight relative to default risk and 3) PE ratios too high relative to growth risks. Not immediately, but over time, credit is exchanged figuratively or sometimes literally for cash in a mattress or conversely for real assets (gold, diamonds) in a vault. It also may move to other credit markets denominated in alternative currencies. As it does, domestic systems delever as credit and its supernova heat is abandoned for alternative assets. Unless central banks and credit extending private banks can generate real or at second best, nominal growth with their trillions of dollars, euros, and yen, then the risk of credit market entropy will increase.

The element of time is critical because investors and speculators that support the system may not necessarily fully participate in it for perpetuity. We ask ourselves frequently at PIMCO, what else could we do, what else could we invest in to avoid the consequences of financial repression and negative real interest rates approaching minus 2%? The choices are varied: Cash to help protect against an inflationary expansion or just the opposite – long Treasuries to take advantage of a deflationary bust; real assets; emerging market equities, etc. One of our Investment Committee members swears he would buy land in New Zealand and set sail. Most of us can’t do that, nor can you. The fact is that PIMCO and almost all professional investors are in many cases index constrained, and thus duration and risk constrained. We operate in a world that is primarily credit based and as credit loses energy we and our clients should acknowledge its entropy, which means accepting lower returns on bonds, stocks, real estate and derivative strategies that likely will produce less than double-digit returns.

till, investors cannot simply surrender to their entropic destiny. Time may be running out, but time is still money as the original saying goes. How can you make some?

(1) Position for eventual inflation: The end stage of a supernova credit explosion is likely to produce more inflation than growth, and more chances of inflation as opposed to deflation. In bonds, buy inflation protection via TIPS; shorten maturities and durations; don’t fight central banks – anticipate them by buying what they buy first; look as well for offshore sovereign bonds with positive real interest rates (Mexico, Italy, Brazil, for example).

(2) Get used to slower real growth: QEs and zero-based interest rates have negative consequences. Move money to currencies and asset markets in countries with less debt and less hyperbolic credit systems. Australia, Brazil, Mexico and Canada are candidates.

(4) Transition from financial to real assets if possible at the margin: Buy something you can sink your teeth into – gold, other commodities, anything that can’t be reproduced as fast as credit.

(5) Be cognizant of property rights and confiscatory policies in all governments.

(6) Appreciate the supernova characterization of our current credit system. At some point it will transition to something else.

We may be running out of time, but time will always be money.

Speed Read for Credit Supernova

1) Why is our credit market running out of heat or fuel?

a) As it expands at a rate of trillions per year, real growth in the economy has failed to respond. More credit goes to pay interest than future investment.

b) Zero-based interest rates, which are the result of QE and credit creation, have negative as well as positive effects. Historic business models may be negatively affected and investment spending may be dampened.

Enjoy the Super Bowl while you think about the Supernova of Debt. I doubt CBS News will ask Obama a tough question that he can’t dodge about this. Maybe they can go back and ask President Bush-since it’s his fault. He started it.

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Thanks for the link Instapundit

Tip of the hat to the guys at Powerline. Hope they don’t pass the Snowbird Tax on you.

By ROMAIN HATCHUEL All around the world, wary investors still don't know whether to trust the quantitative-easing programs of aggressive central bankers or to question the viability of this unprecedented monetary stimulus. Amid the uncertainty, the question is what assets can, over several years, survive the possibility of burst bubbles, subpar growth and soaring inflation. For answers, consider an unlikely investment manual: the U.S. Declaration of Independence.

That inspiring document proclaims life, liberty and the pursuit of happiness as man's most sacred natural rights. Although these concepts may seem abstract to investors, they can provide useful guidelines for investing in uncertain times.

As applied to investing, "life" signifies those things that are essential to existence—namely food, shelter and other prime necessities. Regarding shelter, obviously not all home values can resist economic and financial shocks, as demonstrated by the housing markets in the U.S., let alone in Ireland and Spain. But property prices in highly sought-after locations tend to experience limited downside, or even to appreciate, regardless of the overall state of the economy.

Witness the resilience of London's real-estate market. Prices in its most coveted borough, the City of Westminster, fell less than 15% from their 2008 highs and are now up as much as 26% from their pre-crisis levels, despite Great Britain's multiple-dip recession. Similar (though not as spectacular) patterns have been observed in Paris, New York and other large cities.

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A portrait of Thomas Jefferson in 1805 by artist Rembrandt Peale..With regard to food and household goods, a look at the S&P 500 shows that while the index posted a total return of 8.59% for the five years ended December 2012, the sub-indices for packaged foods, household products, megaretailers and home improvement rose respectively 55.25%, 18.32%, 65.14% and 128.05%. Food commodity prices also rose by more than 22% over the same period, according to the International Monetary Fund. With world population projected by the United Nations to grow by more than two billion, or 30%, over the next four decades, food and household goods are going to remain in high demand.

But populations don't grow evenly, which leads to a second significance of "life" as an investment principle: demographics. Prudent investors may want to think twice before making long-term commitments in countries such as Japan, where the U.N. estimates the population could shrink by 16 million to 28 million (or 13% to 22%) by 2050. Even if Japan remains one of the world's leading exporters, its domestic economy is bound to suffer the consequences of this demographic collapse.

Now how does "liberty" link to safe investment? In troubled times, markets will always pay a higher price to countries where the rule of law, sensible governance and democracy reign. This liberty premium is seen even during relatively calm periods. Venezuela and Lebanon have the same credit rating, but on similar five-year maturities Venezuela currently borrows money at more than 9% interest, while Lebanon (even with its political difficulties) funds itself at 4.8%. The way Argentina last year expropriated a 51% stake in YPF, the largest local energy company, from the Spanish conglomerate Repsol, REP.MC +2.40%is a reminder that political risk is real when it comes to investing.

Then there is the pursuit of happiness, which should be a reason for optimism. Even in times of hardship, man tends to cling to life's small pleasures, at least those he can afford. As the S&P 500 shows, over the past five years the sub-indices for soft drinks, movies and entertainment, and restaurants have outperformed the broader index with respective returns of 24.26%, 49.97%, and 94.26%. Coca-Cola, KO +1.37%Disney DIS +0.57%and McDonald's MCD +0.77%delivered returns ranging from 37% to 75%.

Thomas Jefferson is deservedly revered for having written the first draft of America's founding document, but in doing so he also inadvertently established some guiding principles for investors. Those who believe that the world is still on a dangerous path should remember his powerful words as they make long-term investment decisions.

By DANIEL GORFINE AND BEN MILLER A tectonic shift is under way in how companies raise money—and it will have a profound impact on U.S. investors and markets. According to the Securities and Exchange Commission's most recent estimates, businesses have been raising more funds through private transactions than through debt and equity offerings registered under the securities laws and offered to the general public.

Overall public debt and equity issuances fell by 11% between 2009 and 2010, to $1.07 trillion, while private issues rose by 31%, to $1.16 trillion. This shift, which has been driven by the rising costs of public-market participation and regulation, will likely accelerate when the SEC implements reforms in the Jumpstart Our Business Startups Act, which the president signed into law last April.

The crowdfunding provisions in the JOBS Act are intended to democratize investment opportunities using the Internet and have attracted the most public attention. But another part of the law may have the most impact.

Here is the background. U.S. securities laws have a private-market exemption, called Regulation D, that allows companies to sell securities to accredited investors with high net worth (essentially more than $1 million excluding a home). The exception means the companies don't have to go through the SEC's costly and time-consuming registration and reporting requirements for public offerings. The securities can also be resold to financial institutions that hold a required minimum value of securities investments.

But the securities laws have also banned general solicitations for these private-market offerings—and Title II of the JOBS Act lifts this ban. This means that a company, investment fund or seller now can publicize its offerings via the Internet or traditional advertising media, as long as the ultimate investors are accredited or qualified institutional buyers.

One of the most significant advantages that public markets have held over private markets is the ability to generate substantial market liquidity by advertising to a wider public. Once the SEC implements the legislation, that advantage will gradually fade away.

Until the JOBS Act, Regulation D effectively allowed companies and funds to raise capital only from investors with whom they already have a pre-existing relationship. So money typically flowed into a deal through broker-dealers or arbitrary social networks. This process shuts out a wide swath of prospective investors and, thanks to the lack of a robust trading market, results in lower prices for the securities.

By rolling back the ban on general solicitation, fund offerings and resales of unregistered securities can now flow through vast Internet-based broker-dealers and other finance networks, potentially giving a steroid shot to private capital markets.

According to the Angel Capital Association, there are 8.6 million accredited investors nationwide, of which only 3.1% currently invest in business startups through private markets. The large pool of untapped investors and capital may result simply from a shortage of information regarding investment opportunities or concerns over private market liquidity.

Thanks to the JOBS Act, private capital markets will enjoy increased transparency and therefore greater efficiency. They will also likely experience substantial new capital inflows due to the widespread advertising of offerings. If high-quality companies and funds have access to broad and deep pools of capital in private markets, then the question becomes why many of them would bother with the regulatory compliance and shareholder-management costs of public markets.

We anticipate a paradigm shift in how companies raise money, as they increasingly shun the highly regulated, costly and volatile public markets in favor of now deeper and more efficient private markets. This could be a boon for capital formation.

But it could also mean fewer investment opportunities for the general public. The most promising companies may delay or never file IPOs and instead seek capital on private exchanges not accessible to those who don't qualify as accredited investors—which is 97% of the U.S. population. Meanwhile, novice accredited investors may be bombarded with solicitations for private placement opportunities, without some of the regulatory oversight provided in public markets.

For lawmakers and regulators, however, perhaps the lessons from the success of private markets can help with a reform of public securities regulations, many of which were written nearly a century ago and, at least in part, are the reason for the continuing privatization movement.

Mr. Gorfine is legal counsel and director for financial markets policy at the Milken Institute. Mr. Miller is co-founder of Fundrise, an investment platform that enables direct investment in local real estate and businesses.

The ISM non-manufacturing index declined to 55.2 in January, coming in slightly above the consensus expected 55.0. (Levels above 50 signal expansion; levels below 50 signal contraction.) The direction of the key sub-indexes was mixed in January, but all remain above 50. The new orders index declined to 54.4 from 58.3 and the business activity index fell to 56.4 from 60.8. The employment index rose to 57.5 in January from 55.3 while the supplier deliveries index increased to 52.5 from 48.5.

The prices paid index rose to 58.0 in January from 56.1 in December.

Implications: A very solid, plow horse-like, report on the service sector today as the ISM non-manufacturing index showed expansion for the 37th consecutive month, slightly beating consensus expectations, coming in at 55.2. Although the new orders sub-index and the business activity sub-index – which has a stronger correlation with economic growth than the overall index – declined in January, they still remain at healthy levels. The biggest surprise from today’s report was that the employment sub-index surged again in January coming in at 57.5, the best reading since February 2006. This is a good sign for the economy moving forward. On the inflation front, the prices paid index rose to 58.0 and remains elevated. Given the loose stance of monetary policy, inflation should continue to move higher over the coming years. Today’s report, along with other data we have received this week, show the economy is doing just fine and will continue to plow ahead through 2013.

The Stock Rally That Isn't Comparing the performance of equities to that of commodities—and the U.S. dollar—reveals the real story..By RICH KARLGAARD WSJ

Stocks have finally learned to love President Obama, or so it would seem. This is welcome news, because the start of the affair was awkward. At his first inaugural address on Jan. 20, 2009, Mr. Obama declared: "The state of our economy calls for action: bold and swift." Stocks swiftly sank 5%. Stocks continued to drop for another eight weeks, hitting bottom with a satanic S&P 500 interday low of 666 on March 9, 2009.

Now stocks are flirting with all-time highs, up 88% since Mr. Obama took office and 124% since the lows of March 2009. So shall stock pickers canonize Mr. Obama alongside Ronald Reagan and Bill Clinton?

Not yet. The Obama rally has nothing in common with the 1982-2000 boom. It is much more a replay of the Gerald Ford-Jimmy Carter rally of 1974-80, which was a flight of the U.S. dollar into stocks, commodities, real estate—anything but the weakening greenback.

In December 1974, the S&P 500 hit a low of 67, having fallen 45% over the previous 23 months. The 1973-74 crash coincided with a recession that produced unemployment of 10% and a collapse in American confidence, led by President Richard Nixon's resignation in August 1974 and a worsening situation in Vietnam.

Six years later, in December 1980, the S&P 500 was at 136, a gain of 103%. But over those six years gold rose in value by 182%, oil by 270% and silver by 340%. Nearly every other commodity similarly outpaced the stock gains during the supposed Ford-Carter rally.

The Obama-era stock rally is stronger compared with commodities than was the Ford-Carter rally, but not by much. With the S&P 500 up 124% over the past four years, gold is up 88%, oil 106% and silver 167%.

What does a genuine stock rally look like? For that, see the August 1982 to January 2000 boom, during which the S&P 500 soared 1,194% while gold dropped in value by 35%, oil by 23%, and silver by 17%. Stocks way up. Commodities down.

The difference between illusory stock rallies and the real thing is stark. During the Ford, Carter and Obama years, the weakening U.S. dollar drove investors out of cash. In the Reagan, Bush 41 and Clinton years, Americans benefited from a strong dollar, while stocks (and bonds) wildly outperformed commodities.

The other major difference here is growth. The annual increase in the nation's gross domestic product under Reagan-Bush-Clinton averaged 3.6%. Under Mr. Obama, annual GDP growth is sputtering along at less than half of the Reagan-Bush-Clinton rates.

Where do stocks go from here? Bears fret that stocks have outpaced weak economic growth and therefore are overvalued. The silver lining is that stocks haven't really done that well since March 2009, despite the nominal 124% gain. They could do better—a lot better—if America's tax, regulatory and monetary policies were shaped to provide a 1982-2000 tailwind.

Leftward pundits prefer to think that the stock market is a casino unrelated to the deeper prosperity of the country. But periods like the 1980s and '90s show what can happen when investors put capital into ideas and innovation and thus into the hands of inventors, entrepreneurs and producers. By contrast, during periods when commodities are rising faster than stocks, investors prefer inert objects like gold to real innovation, invention and production.

When Washington gurus crow these days about the Obama stock rally, they might consider whether slightly beating Gerald Ford and Jimmy Carter is the best they can do.

Computer programmers are among the professions where wages have grown.Computer programmer, accountant, mechanical engineer: If you had kids in college these last few years, you probably encouraged them to enter fields of study that landed them in one of those jobs, which were among the strongest bets in a weak labor market.

Yet despite the steady demand for—and low jobless rates among—these professionals during the recession and the first years of recovery, those fields experienced little wage growth between 2007 and 2011, according to data from the Labor Department.

That’s finally starting to change. Earnings for those three occupations and a number of others cited in various surveys gauging the “war for talent” started to experience notable growth in 2012, the government data shows.

Wages rose 3.4% from 2011 to 2012 for full-time workers in computer and mathematical occupations, 5.1% for accountants and auditors, 7.5% for electrical engineers, and 4.4% for mechanical engineers.

For full-time workers in all professions, earnings rose just 1.6%. These figures all come from the DOL’s Bureau of Labor Statistics, which recently released earnings information for approximately 500 occupational categories.

The hope is that rising wages will spread beyond these fields into the broader job market, in which many fields have failed to keep pace with inflation. “It’s a statistic you want to watch,” said Kevin Hallock, director of Cornell University’s Institute for Compensation Studies.

Since professionals often negotiate higher salaries when they leave one employer for another, the findings support other BLS statistics showing that turnover is on the rise—a very good sign for the job market.

Brandon Hilkert, a 32-year-old software engineer who lives near Philadelphia, saw his salary jump from $90,000 to $110,000 in January when he left Meeteor, a social-networking startup that recently shut down, for PipelineDeals, a more established technology firm with offices in Wayne, Pa. and Seattle.

“It was risky to work for a start-up,” he says, adding that he took a pay cut and gave up his healthcare benefits to join Meeteor in 2010. Now, with a new baby at home, the benefits and extra income at his new job add up to greater peace of mind. “It was definitely the right decision for my current situation,” he says.

Since the BLS examines so many occupations, its data offers a fairly general view of earnings trends.

But looking deeper into these favored professions confirms the trends.

Technology professionals have been in especially high demand over the last few years, particularly in areas such as mobile app development and big-data analysis. A salary survey of 15,049 workers released last month by Dice, a tech-industry career site, found that tech salaries rose 5.3% to $85,619 in 2012, up from $81,327 in 2011 – the biggest increase in more than a decade.

Tech salaries were flat for the first three years of the recession and recovery, according to previous Dice surveys. They rose slightly in 2011, but that gain was driven by Silicon Valley and New York, markets with above-average pay. “Now we’re seeing salaries going up across the board,” said Scot Melland, CEO of Dice parent Dice Holdings, Inc.

In engineering, greater competition for professionals led to 2012’s rising pay. For the last three or four years, “Companies were able to meet demand by asking for more out of their present workforce or exporting some functions outside the U.S.,” said Thomas Loughlin, executive director of ASME, formerly known as the American Society of Mechanical Engineers. But those strategies have hit a “saturation point,” he added, and firms now are adding more engineers.

From 2009 to 2011, median incomes were flat or down even in key fields such as mechanical, chemical and electronic engineering. But incomes in all three occupations rose in 2012, by 13.5%, 3.4%, and 5.7%, respectively, according to ASME’s most recent salary survey.

For job seekers across the occupational spectrum, bigger paychecks for the most sought-after workers could signal higher turnover and faster wage growth throughout the economy.

“The high skills in the economy are the canary in the mine,” said Melland. “When you see salaries shifting here, it’s probably a precursor to a wider phenomenon.”